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Differences of Opinion and the Cross Section of Stock Returns

Author

Listed:
  • Karl B. Diether

    (Graduate School of Business, University of Chicago,)

  • Christopher J. Malloy

    (Graduate School of Business, University of Chicago,)

  • Anna Scherbina

    (Harvard Business School)

Abstract

We provide evidence that stocks with higher dispersion in analysts' earnings forecasts earn lower future returns than otherwise similar stocks. This effect is most pronounced in small stocks and stocks that have performed poorly over the past year. Interpreting dispersion in analysts' forecasts as a proxy for differences in opinion about a stock, we show that this evidence is consistent with the hypothesis that prices will reflect the optimistic view whenever investors with the lowest valuations do not trade. By contrast, our evidence is inconsistent with a view that dispersion in analysts' forecasts proxies for risk. Copyright The American Finance Association 2002.

Suggested Citation

  • Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
  • Handle: RePEc:bla:jfinan:v:57:y:2002:i:5:p:2113-2141
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